18.Employee Benefit Plans

First United Corporation sponsors a noncontributory defined benefit pension plan (the “Pension Plan”) covering the employees who were hired prior to the freeze and others who were grandfathered into the plan. The benefits are based on years of service and the employees’ compensation during the last five years of employment.

Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the plan and ceases crediting of additional years of service, after that date. Effective January 1, 2013, the Pension Plan was amended to unfreeze it for those employees for whom the sum of (i) their ages, at their closest birthday, plus (ii) years of service for vesting purposes equals 80 or greater. The “soft freeze” continues to apply to all other plan participants. Pension benefits for these participants will be managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”).

During 2001, the Bank established an unfunded supplemental executive retirement plan (the “SERP”). The SERP is available only to a select group of management or highly compensated employees to provide supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law. Concurrent with the establishment of the SERP, the Bank acquired BOLI policies on the senior management personnel and officers of the Bank. The benefits resulting from the favorable tax treatment accorded the earnings on the BOLI policies are intended to provide a source of funds for the future payment of the SERP benefits as well as other employee benefit costs.

The benefit obligation activity for both the Pension Plan and SERP was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.

On January 9, 2015, First United Corporation and members of management who do not participate in the SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a SERP Alternative Participation Agreement (the “Participation Agreement”). Pursuant to each Participation Agreement, First United Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Participation Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015. The Participation Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events: (i) Normal Retirement (as defined in the Participation Agreement); (ii) Separation from Service (as defined in the Participation Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Participation Agreement); (iii) Separation from Service due to a Disability (as defined in the Participation Agreement); (iv) with respect to a particular award of Employer Contribution Credits, the participant’s completion of two consecutive Years of Service (as defined in the Participation Agreement) immediately following the Plan Year for which such award was made; or (v) death. Notwithstanding the foregoing, however, a participant will lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Participation Agreement). In addition, the Participation Agreement conditions entitlement to the amounts held in the Employer Account on the participant (a) refraining from engaging in Competitive Employment (as defined in the Participation Agreement) for three years following his or her Separation from Service, (b) refraining from injurious disclosure of confidential information concerning the Corporation, and (c) remaining available, at the First United Corporation’s reasonable request, to provide at least six hours of transition services per month for 12 months following his or her Separation from Service (except in the case of death or Disability), except that only item (b) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event.

In January 2016, the Board of Directors of First United Corporation approved a discretionary contribution in the amount of $63,500 on two participants. The contribution had a two-year vesting period and $31,770 of SERP Alternative expense was recorded in 2017 and 2016, respectively. In January 2017, a discretionary contribution in the amount of $112,708, on four participants, was approved by the Board of Directors of First United Corporation. The contribution also has a two-year vesting period and $56,354 of SERP Alternative expense was recorded in 2017. In January 2018, a discretionary contribution in the amount of $119,252 on four participants was approved by the Board of Directors of First United Corporation. This contribution will be expensed through 2019.

The following tables summarize benefit obligation and funded status, plan asset activity, components of net pension cost, and weighted average assumptions for the Pension Plan and the SERP:



		Pension				SERP
(in thousands)		2017		2016		2017		2016
Change in Benefit Obligation
Obligation at the beginning of the year	$	41,086	$	39,416	$	7,302	$	6,289
Service cost		278		305		113		100
Interest cost		1,650		1,740		293		279
Change in discount rate and mortality assumptions		3,285		3,127		0		0
Actuarial losses		450		149		112		775
Settlement losses		0		(268)		0		0
Benefits paid		(1,774)		(3,383)		(207)		(141)
Obligation at the end of the year		44,975		41,086		7,613		7,302
Change in Plan Assets
Fair value at the beginning of the year		40,989		39,200		0		0
Actual return on plan assets		5,001		2,172		0		0
Employer contribution		3,000		3,000		207		141
Benefits paid		(1,774)		(3,383)		(207)		(141)
Fair value at the end of the year		47,216		40,989		0		0
Funded/(Unfunded) Status	$	2,241	$	(97)	$	(7,613)	$	(7,302)



		Pension				SERP
(in thousands)		2017		2016		2017		2016
Components of Net Pension Cost
Service cost	$	278	$	305	$	113	$	100
Interest cost		1,650		1,740		293		279
Expected return on assets		(3,002)		(2,796)		0		0
Amortization of transition asset		0		0		0		0
Amortization of recognized loss		1,057		848		146		73
Amortization of prior service cost		12		12		(3)		20
Net pension (income)/expense in employee benefits	$	(5)	$	109	$	549	$	472

Weighted Average Assumptions used to
determine benefit obligations:
Discount rate for benefit obligations		3.60%		4.10%		4.00%		4.00%
Discount rate for net pension cost		4.10%		4.50%		0		0
Expected long-term return on assets		7.00%		7.00%		0		0
Rate of compensation increase		3.00%		3.00%		3.00%		3.00%
Mortality tables		RP-2014		RP-2014		N/A		N/A

The accumulated benefit obligation for the Pension Plan was $41.8 million and $38.2 million at December 31, 2017 and 2016, respectively. The accumulated benefit obligation for the SERP was $7.6 million and $6.3 million at December 31, 2017 and 2016, respectively.

During the fourth quarter of 2016, the Corporation offered a temporary lump sum window in its Pension Plan under which terminated employees who had not yet started to receive their pension benefits could elect to receive lump sum payments in lieu of any future pension benefits. Approximately 90 participants elected to receive lump sum payments, and lump sum payments totaling $1.7 million were made from the Pension Plan. This window closed on December 1, 2016.

The investment assets of a defined benefit plan are managed with the goal of providing for retiree distributions while also supporting long-term plan obligations with a moderate level of portfolio risk. In order to address the variability over time of both risk and return, the plan investment strategy entails a dynamic approach to asset allocation, providing for normalized targets for major asset classes, with the ability to tactically adjust within the following specified ranges around those targets.



Asset Class	Normalized Target	Range
Cash	5%	0% - 20%
Fixed Income	40%	30% - 50%
Equities	55%	45% - 65%

Decisions regarding tactical adjustments within the above noted ranges for asset classes are based on a top down review of factors expected to have material impact on the risk and reward dynamics of the portfolio as a whole. Such factors include, but are not limited to, the following:

Anticipated domestic and international economic growth as a whole;

The position of the economy within its longer term economic cycle; and

The expected impact of economic vitality, cycle positioning, financial market risks, industry/demographic trends and political forces on the various market sectors and investment styles.

With respect to individual company securities, additional company specific matters are considered, which could include management track record and guidance, future earnings expectations, current relative price expectations and the impact of identified risks on expected performance, among others. A core equity position of large cap stocks will be maintained, with more aggressive or volatile sectors meaningfully represented in the asset mix in pursuit of higher returns.

Strategic and specific investment decisions are guided by an in-house investment committee as well as a number of outside institutional resources that provide economic, industry and company data and analytics. It is management’s intent to give the Plan’s investment managers flexibility with respect to investment decisions and their timing within the overall guidelines. However, certain investments require specific review and approval by management. Management is also informed of anticipated changes in nonproprietary investment managers, significant modifications of any previously approved investment, or the anticipated use of derivatives to execute investment strategies.

Portfolio risk is managed in large part by a focus on diversification across multiple levels as well as an emphasis on financial strength. For example, current investment policies restrict initial investments in debt securities to be rated investment grade at the time of purchase. Also, with the exception of the highest rated securities (e.g. - U.S. Treasury or government-backed agency securities), no more than 10% of the portfolio may be invested in a single entity’s securities. As a result of the previously noted approaches to controlling portfolio risk, any concentrations of risk would be associated with general systemic risks faced by industry sectors or the portfolio as a whole.

Assets in the Pension Plan are valued by the Corporation’s accounting system provider who utilizes a third-party pricing service. Valuation data is based on actual market data for stocks and mutual funds (Level 1) and matrix pricing for bonds (Level 2). Cash and cash equivalents are also considered Level 1 within the fair value hierarchy.

As of December 31, 2017 and 2016, the value of Pension Plan investments was as follows:


December 31, 2017					Fair Value Hierarchy
(Dollars in thousands)		Assets at Fair Value	% of Portfolio		Level 1		Level 2
Cash and cash equivalents	$	1,887	4.0%	$	1,887	$	0
Fixed income securities:
U.S. Government and Agencies		508	1.1%		0		508
Taxable municipal bonds and notes		4,070	8.6%		0		4,070
Corporate bonds and notes		10,483	22.2%		0		10,483
Preferred stock		540	1.1%		0		540
Fixed income mutual funds		3,031	6.4%		3,031		0
Total fixed income		18,632	39.4%		3,031		15,601
Equities:
Large Cap		16,840	35.7%		16,840		0
Mid Cap		2,077	4.4%		2,077		0
Small Cap		1,974	4.2%		1,974		0
International		5,806	12.3%		5,806		0
Total equities		26,697	56.6%		26,697		0
Total market value	$	47,216	100.0%	$	31,615	$	15,601



December 31, 2016					Fair Value Hierarchy
(Dollars in thousands)		Assets at Fair Value	% of Portfolio		Level 1		Level 2
Cash and cash equivalents	$	1,951	4.8%	$	1,951	$	0
Fixed income securities:
U.S. Government and Agencies		227	0.5%		0		227
Taxable municipal bonds and notes		3,630	8.9%		0		3,630
Corporate bonds and notes		9,500	23.2%		0		9,500
Preferred stock		492	1.2%		0		492
Fixed income mutual funds		2,682	6.5%		2,682		0
Total fixed income		16,531	40.3%		2,682		13,849
Equities:
Large Cap		16,917	41.3%		16,917		0
Mid Cap		2,477	6.0%		2,477		0
Small Cap		1,199	2.9%		1,199		0
International		1,914	4.7%		1,914		0
Total equities		22,507	54.9%		22,507		0
Total market value	$	40,989	100.0%	$	27,140	$	13,849

The expected rate of return on Pension Plan assets is based on a combination of the following:

Historical returns of the portfolio of assets;

Monte Carlo simulations of expected returns for a portfolio with strategic asset targets similar to the normalized targets; and

Market impact adjustments to reflect expected future investment environment considerations.

At December 31, 2017, the 25-year average return on pension portfolio assets was 7.42%, exceeding the expected long-term return of 7.00% utilized for 2017. Considering that future equity returns are partially a function of current starting valuations and the general level of interest rates is at a historically low point, one could start to build a case for lower expected returns going forward. However, according to a recent Vanguard Global Economics Team white paper, over half of the volatility in expected returns is not explained by current valuations. As potential returns remain widely dispersed and expected returns are based on a time horizon that will likely exceed the timing of current concerns, it is considered appropriate to maintain the forward expected long-term rate of return of 7.00%.

The Pension Plan did not hold any shares of First United Corporation common stock at December 31, 2017 or 2016.

Estimated cash flows related to expected future benefit payments from the Pension Plan and SERP are as follows:


(In thousands)		Pension Plan		SERP
2018	$	1,850	$	238
2019		1,971		308
2020		2,059		307
2021		2,192		363
2022		2,273		365
2023-2027		12,944		2,189

First United Corporation funded an annual contribution of $3.0 million to the pension plan in the first quarter of 2017. First United Corporation will continue to evaluate future annual contributions to the Pension Plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. The Bank expects to fund the annual projected benefit payments for the SERP from operations.

Amounts included in accumulated other comprehensive loss as of December 31, 2017 and 2016, net of tax, are as follows:



		2017				2016
(In thousands)		Pension		SERP		Pension		SERP
Unrecognized net actuarial loss	$	17,883	$	860	$	14,335	$	729
Unrecognized prior service costs		7		(8)		13		(8)
	$	17,890	$	852	$	14,348	$	721

The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic pension cost during the next fiscal year are as follows:



(In thousands)		Pension		SERP
Prior service costs	$	9	$	(3)
Net actuarial loss		1,200		161
	$	1,209	$	158